Rental property deductions
The taxpayer in The Applicant v Commissioner of Taxation [2012] AATA 174 owned a property in regional NSW which had been vacant for five years. As well as the taxpayer’s residence, the taxpayer owned other properties in regional NSW. Originally the taxpayer claimed rental expenses of $6670 (interest of $4170 and other expenses of $2500), in relation to the vacant property. The taxpayer requested an increase in expenses for further interest and other costs such as telephone, electricity, insurance, repairs and inspection expenses.
The Commissioner disallowed the additional expenses because the rental property was not available for rent in the 2007 financial year. The taxpayer argued that the property was available for rental but remained vacant because of its remote location.
Despite the low level of promotion of the property for rent the Tribunal was satisfied that the property was available for rent in the 2007 financial year. The Tribunal held that “although efforts to find suitable tenants did not appear to have been vigorous, the location of the property is likely to have been a factor” in the property remaining vacant.
The Tribunal then considered the additional deductions claimed by the taxpayer and held that some expenses were allowable as they could be substantiated and there was sufficient nexus between those additional deductions and the production of assessable income for the purposes of s 8-1(1)(a) of the ITAA 1997. Other additional expenses could not be substantiated and were not allowed. In the case of the extra interest expenses claimed the nexus or connection with the property could not be established.
This case serves as a reminder of the basics: rental expenses must be substantiated, and there must be a nexus or connection with the property. As long as the property is available for rental, it is not necessary for the purposes of claiming deductions that rental income is received.
Tax agents and PI Insurance
In the case of Lengyel and Tax Practitioners Board [2012] AATA 134, the applicant, a tax agent, argued that he should be exempt from the Tax Practitioners Board’s requirement to hold PI insurance because, among other things:
- he was a sole practitioner with an annual turnover of about $10,000 in taxation and commercial work
- he was highly qualified
- the degree of risk relating to his tax agent work was nil
- he would be disadvantaged by the PI requirement although he would not suffer hardship.
The Board rejected the tax agent’s exemption application because of its policy (applying from 1 July 2011) that except in certain specific circumstances, a tax agent providing services for reward must hold PI insurance. The Tribunal affirmed the decision of the Board and did not consider that the tax agent was disadvantaged in having to obtain PI insurance for a modest outlay.
Was there a CGT event? Wait and see
In Kalafatis and FCT [2012] AATA 150, the taxpayer claimed that a capital gain of $100,000 was incorrectly included in his income tax return, without his consent, by his accountant. The taxpayer is challenging the alleged transfer of the two parcels of land to family members giving rise to the capital gain in the Supreme Court. The AAT has decided to defer proceedings before it in relation to the capital gain, pending the outcome of Supreme Court action.
The Tribunal held that as the matter was before the Supreme Court, the Tribunal should defer its consideration of the matter until the Supreme Court matter had been decided. What was being decided by the Supreme Court would be relevant in determining if in fact there was a CGT event.
A CGT event generally arises when there is a change in the legal and beneficial ownership of an asset and given the challenge to the alleged transfers of the two parcels of land the determination of any CGT liability will ultimately depend on the Supreme Court decision.
The Tribunal held that it was appropriate to defer the matter rather than have the matter withdrawn and then reinstated, as argued by the taxpayer, because the taxpayer did not have a right to have a matter reinstated after it had been withdrawn.
